## Facts

- Jane Wood and her husband divorced in 1984 after a long marriage; the husband had significant unpaid federal income tax liabilities for 1980–1983.
- The IRS recorded federal tax lien notices against the husband in Jefferson County, Kentucky, including liens for 1980–1982 liabilities.
- The couple jointly owned a mortgaged residence (“Berry Hill”); the mortgage lender began state foreclosure proceedings in 1984.
- Anticipating divorce, the spouses executed a property settlement agreement in March 1984.
- Under the agreement, the husband would convey Berry Hill and certain lots to Jane Wood; she would sell the properties and, from the sale proceeds, pay specified encumbrances, including an identified federal tax lien (with stated amount plus interest), before keeping any remaining proceeds.
- After the property was sold, Jane Wood did not apply the proceeds to satisfy the federal tax lien as contemplated by the agreement.
- The United States sued Jane Wood in federal court, claiming it was an intended third-party beneficiary of her contractual promise to pay the federal tax lien from the sale proceeds.

## Issues

1. Whether the United States, as a creditor identified in a divorce property settlement agreement, was an intended third-party beneficiary entitled to enforce the agreement against the spouse who promised to pay the federal tax lien.
2. Whether Jane Wood breached the settlement agreement by failing to apply sale proceeds to the federal tax lien.
3. Whether the amount recoverable by the United States had to be reduced to account for funds held or applied through related state foreclosure/receivership proceedings.

## Decision

- The Sixth Circuit affirmed summary judgment for the United States on liability, holding the government was an intended third-party beneficiary of the settlement agreement.
- The court held Jane Wood breached the agreement by failing to pay the federal tax lien from the sale proceeds as promised.
- The court modified the judgment amount by crediting Jane Wood for certain funds held by a state-court receiver in the foreclosure-related proceedings, to avoid an improper recovery beyond amounts attributable to her obligation.

## Legal Principles

- Under contract law applied by the court, a creditor may enforce a contract made for its direct benefit when the contract shows the parties intended to benefit that creditor (intended creditor-beneficiary), not merely incidentally affect it.
- Express identification of a creditor and a directive that the creditor’s claim be paid from a specified fund (sale proceeds) is strong evidence of intended third-party beneficiary status.
- When enforcing such a promise, courts may reduce the recoverable amount to account for funds already captured, held, or applied through related proceedings, preventing recovery beyond the obligor’s net responsibility.

## Conclusion

The Sixth Circuit held the United States could enforce a divorce property settlement agreement as an intended creditor-beneficiary where the agreement expressly required payment of an identified federal tax lien from sale proceeds, affirmed liability for breach, and reduced the judgment by crediting receiver-held funds connected to the foreclosure process.


United States v. Wood, 877 F.2d 453 (6th Cir. 1989)